Big data, big representations, big implications

On 20 December 2016 the European Commission (EC) sent a Statement of Objections to Facebook alleging that the company provided incorrect or misleading information in relation to the technical difficulty of automatically matching Facebook users’ accounts with WhatsApp users’ accounts, during the EC’s investigation into Facebook’s acquisition of WhatsApp in 2014.

This follows an announcement by WhatsApp in August 2016 that it would be “coordinating more with Facebook” including by connecting customer phone numbers with Facebook’s systems.

The alleged representations

During the EC’s investigation into the WhatsApp acquisition a number of third parties raised as a potential concern the ability of WhatsApp and Facebook’s user networks to be combined into one, substantially larger network, which could substantially strengthening network effects.

Facebook submitted that “integration between WhatsApp and Facebook would pose significant technical difficulties.” Relevantly, according to the EC, Facebook submitted that:

“[the] integration of WhatsApp’s and Facebook’s networks would require matching WhatsApp users’ profiles with their profiles on Facebook (or vice versa). This would be complicated without the users’ involvement since Facebook and WhatsApp use different unique user identifiers: Facebook ID and mobile phone number, respectively. Consequently, Facebook would be unable to automatically and reliably associate a Facebook ID with a valid phone number used by a user on WhatsApp. Matching of WhatsApp profiles with Facebook profiles would most likely have to be done manually by users, which in the Notifying Party’s view is likely to result in a significant backlash from both users of Facebook and WhatsApp”.

On the basis of Facebook’s submission, the EC decided that integration between WhatsApp and Facebook would pose “significant technical difficulties”, risks to Facebook’s business and would not limit competition in the market for consumer communications.

Implications in the EU

If the EC’s concerns are substantiated, Facebook may face fines of up to 1% of turnover for supplying incorrect or misleading information.

Facebook has until 31 January 2017 to respond to the EC’s Statement of Objections. However, there is no deadline for the EU to finalise its a decision on whether Facebook provided incorrect or misleading information.

The EC also has power to unwind the merger, although it has indicated that its current investigation is limited to breaches of procedure.

More than two years after the EC’s approval of Facebook’s acquisition of WhatsApp, the EC’s allegations provide a timely reminder of the importance of providing unambiguous and correct technical information to regulators assessing merger clearances and the ongoing risks of failing to do so.

What could happen in Australia?

In providing any merger clearance, the ACCC expressly reserves the right to reconsider its decision if new information comes to its attention or the ACCC becomes aware that any information on which it has based its view is incorrect or incomplete.

If, based on new and correct information, the ACCC considers that the completed acquisition is likely to contravene the Act (on the basis that it has the effect or likely effect of substantially lessening competition in a market), the ACCC can apply to the Federal Court for damages (up to 6 years after the acquisition) or divestment orders (up to 3 years after the acquisition).

Even if the new and correct information does not lead to a changed view as to whether the acquisition is likely to substantially lessen competition in any market, the provision of inaccurate information is likely to result in substantial caution and additional scrutiny of any future notifications by the acquirer.

The provision of incorrect or misleading information can also have significant legal consequences if provided in response to a mandatory information request or “section 155 notice” (which the ACCC is increasingly using in its assessment of mergers). It is a criminal offence to knowingly furnish information or give evidence that is false or misleading in response to a section 155 notice. A breach of this section can lead to a fine of up to $3,600 or imprisonment for 12 months. As part of the Harper reforms, the Government has introduced draft legislation to increase these penalties to a fine of up to $18,000 or imprisonment for 2 years.

In addition, it is an offence under section 137 of the Criminal Code to give information to a Commonwealth entity, including the ACCC, knowing that the information is false or misleading or omits any matter or thing without which the information is misleading. This can lead to 12 months imprisonment.

Together these consequences provide a strong incentive for companies to provide clear, accurate and comprehensive information in relation to any merger or acquisition that is the subject of an ACCC review.